Although inflation remains "somewhat elevated," FOMC officials agreed to cut interest rates because "downside risks to employment have risen."

"Many firms passed on at least a portion of cost increases to consumers through price hikes or surcharges, although some held off raising prices because of customers' growing price sensitivity, resulting in compressed profit margins," according to the Fed's latest Beige Book survey.

Newly released Fed study projects that the Trump administration's approach to immigration and deportation will reduce U.S. GDP growth by nearly 1 percentage point this year.

"This is the kind of thing that if you do see it sustained at higher levels—and definitely if it keeps increasing—that's the kind of worrying inflation for the Fed."

Federal Reserve Bank of Chicago President Austan Goolsbee warns that lessons from the pandemic suggest tariffs might become inflationary by creating supply-side disruptions.

"The committee is very much in the mode of waiting to see what policies are enacted," according to Chairman Powell.

In his first term, Trump bashed the Fed for allowing higher interest rates in the U.S. vs. Europe to drive up the dollar and hurt exports. Next year will likely bring more of the same, as the U.S. economy remains considerably stronger, meaning rates here will likely fall more slowly than in the Eurozone.

Nevertheless, the Fed may feel compelled to raise interest rates as soon as the first signs of a tariff-led bump in inflation emerge.